Invention Expenses

[GTS1101]

My client invented a garden tool. He had to pay for the patent, he had to pay for advertising the product. And he had to pay other expenses. He has no income yet as the product is still being developed. It is going to be placed in Home Depot and other stores like that and then I believe he will get royalty income off the sales.

Where does he write off these expenses? Sch C? When income comes in if royalty I believe it goes on Sch E. Do I put expenses on Sch C and then move to E when royalty income starts coming in? I believe he has spent almost 6,000 to develop this product in expenses.

Has anybody else dealt with invention expenses?

GTS1101

[solomon]

Try §195 and §174 and Regulations thereunder. If you don't like the Code and Regulations, see Publication 535. I might add, I did have one last year similar to yours. He spent 20K in 2009 trying to develop a new type of gun. Some of cash outlay at that point would fit §195 and will be deductible the month the business begins.

Regarding the rest of the cash outlay, I believe is lost because my understanding to fit §174 there has to be some evidence of an on going business - not completely satisfied on that aspect, however.

[Davc]

When the income comes in it will go on Schedule C unless he sells the patent itself with no retained interest in which case it would go on schedule D.

[gkaiseril]

And if the inventor has a royalty agreement on the use of the patent, then you would use schedule E for the royalties and amortize the development cost and cost of obtaining the patent. You may also have expenses defending the ownership of the patent.

[Kram BergGold]

patent expenses

Expenses to get a patent are amortized over 15 years.

[solomon]

My client invented a garden tool. He had to pay for the patent, he had to pay for advertising the product. And he had to pay other expenses. He has no income yet as the product is still being developed. It is going to be placed in Home Depot and other stores like that and then I believe he will get royalty income off the sales.

Where does he write off these expenses? Sch C? When income comes in if royalty I believe it goes on Sch E. Do I put expenses on Sch C and then move to E when royalty income starts coming in? I believe he has spent almost 6,000 to develop this product in expenses.

Has anybody else dealt with invention expenses?

GTS1101

From §1.197-2 ---------- From your description, seems like (B) would apply regarding the patent but §174 might apply to some of the expenses related to R & D.

(f) Computation of amortization deduction —(1) In general. Except as provided in paragraph (f)(2) of this section, the amortization deduction allowable under section 197(a) is computed as follows:

(i) The basis of an amortizable section 197 intangible is amortized ratably over the 15-year period beginning on the later of—

(A) The first day of the month in which the property is acquired; or

(B) In the case of property held in connection with the conduct of a trade or business or in an activity described in section 212, the first day of the month in which the conduct of the trade or business or the activity begins.